Its going to be a demanding year for fiduciaries of retirement plans, particularly of those in the small and mid-market which are not particularly accustomed to paying close attention to them. I have blogged earlier on the increased fiduciary demands related to the new data provided to fiduciaries under the 2008 Form 5500 Schedule C and Schedule A. But there is another unusually dicey issue that is soon to land on their laps: voting proxies on stocks and mutual funds following an economic collapse.

On October 17, 2008, the DOL issued a new Interpretive Bulletin, 2509.8-2, on the manner in which a fiduciary needs to deal with the voting of proxies on stocks and mutual funds held as assets of plans. It was generally seen as a reaffirmation of the EBSA’s long held views on shareholder activism, and the need for a plan to make proxy decisions based solely on the plan’s own economic interests.  

But the I.B. is especially rich in describing the fiduciary processes that is required of a plan in dealing with proxies.  It notes that the fiduciary responsible for voting the proxies must

  1.  vote the proxy, or
  2. monitor those who are voting proxies and review the basis for their votes, or
  3. if proxies are not voted, make an affirmative decision that the burden of doing a proper review is too high given the benefit to the plan; and
  4. of course, document all of this.

None of this is really news to any one who has advised fiduciaries. But the problem of "paying attention" to these rules is a very real one given the financial collapse of the past year.

The anger at the leaders of financial institutions of the collapsed titans is very real, and well documented; there is great outrage at the amazing recovery (and related executive compensation quickly paid) within those organizations while the massive  "collateral damage" and personal trauma throughout the world continues;  and the continued befuddlement is palatable at the lack accountability of corporate board members, where it seems to be quickly becoming "business as usual."

The IB strongly warns us that, from the fiduciary’s view, any attempt to use proxy voting to apply any sort of sense of "economic justice" would be mislaid and be a fiduciary breach.  But the IB ALSO strongly warns us that that same fiduciary must  follow a process and take proxy voting (which has typically been seen as a "throwaway" sort of "bother") seriously and, particularly this year, consider whether their vote is in the best economic interests of the plan.

I would suggest that this likely means, that when voting for Board members (for example) or on other proxy issues, a fiduciary needs to address whether the current Board candidates and compensation schemes serves the plans best interests: that is, the continued financial strength of the stock held by the plan.  For mutual fund boards, the question would be more of a process question: how active where the mutual fund boards in overseeing the voting the proxies on the shares owned by the mutual fund.

This sounds like an awful lot of work, particularly if the fiduciaries themselves are struggling to keep their own businesses going. So, what’s a fiduciary to do? Perhaps the following:

  1. Find out who has the duty to vote proxies under the plan. The I.B. does a good job of helping a plan sponsor work through this.  
  2. Make whatever decision is made on the proxy voting process part of the  Investment Policy statement.
  3. Research (or get someone to research), within reason, the the proxy issues-noting, particularly that voting on Board members is not a simple "throwaway."
  4. If there will be no vote, establish that it is too burdensome for the plan to do all those things needed to make an informed vote.
  5. Of course, document all of this.





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